TD Economics: Avoiding what might have been with USMCA

By Brian DePratto
Senior Economist

Subject to legislative passage by participating national governments, much in the new U.S. Canada Mexico Agreement (USMCA) was as expected, with auto rules that largely mimic those agreed over the summer in U.S.-Mexican bilateral negotiations, a modest opening up of Canadian dairy and poultry markets, and the preservation of ‘Chapter 19’ dispute panels for resolving anti-dumping complaints.

While far from perfect, the USMCA is likely to be at least marginally growth-positive for Canada’s economy.

Most important is that

1) the sizeable economic benefits already realized from the existing agreement have been preserved, and

2) the cloud of uncertainty that has hung over exports and business investment has been lifted.

With the agreement touching on nearly all sectors of the highly integrated North American economy, there is much to unpack. Here are highlights of the implications for key Canadian industries:

The conclusion earlier this month of NAFTA renegotiations with the creation of new U.S. Mexico Canada Agreement (USMCA) removes the cloud of uncertainty hanging over exports and investment.

For the Bank of Canada, the result is likely to be an improved economic outlook, and thus a tilt in the balance of risks towards a slightly faster pace of interest rate hikes than we had penciled in prior. Financial markets appear to have incorporated this information, as market pricing for future rate hikes moved up markedly in the wake of the agreement.

As with all trade agreements, while the aggregate result should be positive for the economy, the benefits are unlikely to be evenly distributed.

Among those benefitting the most are consumers, who should see increased purchasing power partly reflecting higher ‘de minimis’ thresholds, and the auto/parts sector, which have avoided the threat of steep tariffs. Indeed, changes to rules of origin and other requirements largely dovetail with existing Canadian production patterns.

Protected agricultural industries, such as dairy, will see a further opening up of domestic markets to foreign competition. The federal government has already indicated that compensation is forthcoming.

If there are soft spots it is that U.S. steel and aluminum tariffs remain in place, and that the process of negotiation itself may have resulted in some scarring of business investment. On the former, there is still hope that these widely unpopular tariffs that present a cost burden for U.S. auto manufacturers (among others) may be lifted given the new agreement.